Question

Suppose you and other people enjoy the view of your neighbour's prize-winning garden. Please explain this in terms of externality

Answer 1

Enjoying the view of neighbor's price-winning garden gives utility/satisfaction to other people. So, the Garden creates Positive Externality to all other people.

A +ve externality exists when the consumption of a good benefits a third party. This third party is not involved in the transaction but enjoys the benefits. In such cases, the derived social benefits outweigh the private benefits. This externality creates deadweight loss in the market as it leads over consumption of the Garden by third party.

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